California Teacher Fund Needs $4.5 Billion Yearly Boost

Feb. 5 (Bloomberg) -- The California State Teachers’
Retirement System needs as much as $4.5 billion more a year for
three decades to pay all the benefits the second biggest U.S.
public pension must cover, an internal report found.

The fund, which took in $6 billion last fiscal year, would
need teachers, school districts and the state to increase their
contributions by 15 percent combined annually to erase its
funding gap, according to the report to its governing board.

Pension costs for retired public employees are straining
governments from California to Rhode Island. Calstrs, as the
$158 billion teachers’ fund is known, has just 69 percent of the
assets needed to cover projected liabilities. Without changes,
it would run out of money by 2046, according to the report,
which is intended to help the board and lawmakers to come up
with options.

“The weak financial markets of the past decade, together
with the fact that contribution rates were not adjusted in
response to the low returns, have undermined the long-term
funding” of the plan, the report said. That “can only be
effectively addressed by increasing the contributions paid by a
combination of members, employers and the state.”

Unlike the California Public Employees’ Retirement System,
the largest public pension, the amount that teachers, school
districts and the state must pay annually is fixed and can only
change through legislation. Calpers, with a market value of $256
billion, can increase rates when investment returns lag behind
targets.

Phased In

Any increase for Calstrs could be phased in gradually to
lessen the impact on teachers, schools and state taxpayers, the
report said.

Teachers pay 8 percent of their wages to finance pensions,
a rate that hasn’t changed since 1972. School districts pay 8.25
percent of payroll, a figure unchanged in more than two decades,
according to the report. State taxpayers contribute about 5.3
percent.

The fund’s board in February 2012 lowered its assumed rate
of return on investments to 7.5 percent from 7.75 percent. The
change added $5.9 billion to the system’s funding gap. Losses
suffered in 2008 and 2009 added $12.7 billion to its shortfall.

The so-called funding ratio has been less than 100 percent
since 2001. Because the ratio is “smoothed” by averaging three
years of investment returns to reduce volatility, the latest gap
only partially reflects the almost 24 percent net gain from
investments in fiscal 2011, according to a separate report to
the board in April.

While Governor Jerry Brown, a Democrat, and lawmakers last
year enacted a package of bills to curb public-employee pension
costs, the legislation didn’t deal with Calstrs’s unfunded
liability.